Drawing on 40 years of experience in financial markets in which he has seen major rallies and catastrophic crashes in stock prices, Norio Nakajima, the head of one of Japan’s biggest asset managers, says he predicts a “long bull market” ahead.

“People buying stocks until now were mainly wealthy, or people who really liked stocks. It was that kind of a unique market,” Mr. Nakajima, the chief executive of DIAM Co., recently told JRT.

A big factor that will sustain Japan’s five-month stock rally, Mr. Nakajima argues, is the broadening of Japan’s small investors from a confined group of wealthy individuals and day traders to a wider swath of average Japanese households.

“The presence of retail investors has grown. That is decidedly different from the past. No one’s really noticed yet, but in a word, Japan’s stock market has ‘democratized,’” he added.

Mr. Nakajima heads the country’s largest asset-management house by institutional assets, managing about $116 billion of assets worldwide including public and corporate pension funds. The company was established in 1999 through the merger of three asset-management arms of lender Mizuho Financial Group Inc. and insurer Dai-ichi Life Insurance Co.

So are the retail investors really coming back into the market?

Small investors now account for 30% of trading value on Japan’s three main exchanges, up from 20% in October. During that period from mid-November, the Nikkei Stock Average has gained more than 50%, recently hitting its highest level since August 2008.

The number of individual shareholders in Japan has been climbing steadily since the 1950s, touching 45.9 million at the end of March 2012 compared with 33.8 million a decade ago, according to a survey by the Tokyo Stock Exchange. While the figure is inflated due to multiple counting of individuals for each company they hold stock in, Mr. Nakajima says the 36% growth in the last decade is a sign of democratization.

In a recent shift, market players say Japanese retail investor money is also flowing back into start-up companies instead of the large, blue-chip exporter stocks that were the initial driver of the rally due to the weaker yen. The Jasdaq Stock Average and the TSE’s Mothers index for small-capital firms have risen 50% and 64% so far this year, outperforming the Nikkei’s 28% increase.

Reflecting strong demand, DIAM last month halted sales of its equity fund specializing in Japan’s emerging market stocks after hitting an Y8 billion cap on net assets it set on the fund.

And is the rally going to continue?

Mr. Nakajima says the key to that answer lies in reading the changes in trading turnover.

In two previous rallies, in the late 1980s and the mid-2000s, the volume of trades on the TSE hit highs about a year and a half before the market itself peaked, he said. In the latest bull market, stock trading volume on the TSE’s first section hit an all-time record of 6.45 billion shares on April 5.

When asked if the current rally will therefore peak in a year and a half, Mr. Nakajima said, “I think it could go a little longer than that.”

About Japan Real Time

Japan Real Time is a newsy, concise guide to what works, what doesn’t and why in the one-time poster child for Asian development, as it struggles to keep pace with faster-growing neighbors while competing with Europe for Michelin-rated restaurants. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, the site provides an inside track on business, politics and lifestyle in Japan as it comes to terms with being overtaken by China as the world’s second-biggest economy. You can contact the editors at japanrealtime@wsj.com